About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

Forex Trading Guide: U.S. August NFP Report

While the upcoming August NFP release might not do much to revive September rate hike expectations for the Fed, it could be an excellent opportunity to grab quick forex profits from the dollar pairs. But before y’all go off to catch those pips, make sure you read this Forex Trading Guide to see what’s in store.

What is this event all about?

Nope, NFP isn’t an acronym for numerous forex profits, although it could yield just that if you play your cards right. NFP actually stands for non-farm payrolls, which measures the change in the number of people employed in U.S. non-farming sectors such as manufacturing, services, or construction. This is reported on a monthly basis, along with the unemployment rate which indicates the percentage of the work force that is jobless and actively seeking employment.

Forex traders also usually pay attention to the underlying employment figures such as the participation rate or average hourly earnings, as these provide more insight on labor market trends. Aside from that, revisions to previous data also tend to affect the dollar’s overall reaction to the jobs report.

What happened last time?

The July NFP report showed that the U.S. economy added 215,000 jobs during the month, lower than the projected 222,000 gain and the previous month’s 231,000 increase in hiring. Meanwhile, the jobless rate was unchanged at 5.3% as expected.

As I’ve discussed in my July NFP review, underlying components reflected steady employment gains across all sectors and that full-time hiring picked up. The participation rate held steady at 62.6%, indicating that Americans are staying in the labor force to carry on with their job hunt, while average hourly earnings showed a meager 0.2% uptick.

USDX 15-min Forex Chart

As you can see from the U.S. dollar’s reaction to the report, the initial rally was quickly followed by a sharp reversal when forex junkies realized that the July figures weren’t strong enough to seal the deal for a Fed liftoff in September. Most traders were probably hesitant to commit to their long dollar positions back then, opting to wait for the August numbers instead.

What’s expected for the upcoming release?

A lot has changed since the earlier NFP release, as the global equity slump and the downturn in commodity prices added a fresh batch of plot twists to the ongoing U.S. recovery. To top it off, the Chinese central bank decided to throw in a few more surprises by devaluing the yuan and cutting interest rates. All in all, these seemed enough to change the U.S. job market status from “Going strong” to “It’s complicated.”

Nonetheless, forex analysts are still hoping to see a 217,000 increase in employment for August, a slightly stronger pace of growth compared to that of July. This might even be enough to push the unemployment rate down from 5.3% to 5.2% for the month and yield another 0.2% uptick in average hourly earnings.

Leading indicators seem to be hinting at a downside surprise since the ADP non-farm employment change report showed a disappointing 190,000 increase versus the projected 204,000 gain. Aside from that, the previous month’s reading was downgraded from 185,000 to 177,000, suggesting that negative revisions might also be seen for the actual NFP report. In addition, the ISM manufacturing PMI showed a decline in its employment sub-index for August.

How might the U.S. dollar react?

Even though most market watchers have pretty much chucked their September rate hike bets out the window, seeing the August NFP meet or beat expectations might still spur gains for the U.S. dollar. After all, risk appetite is looking feeble these days so the safe-haven dollar is in demand. Besides, regardless of when the Fed actually decides to tighten monetary policy, the U.S. economy is still faring much better compared to its peers. Heck, Canada just confirmed that it slipped into recession in Q2!

On the other hand, weaker than expected NFP results could force the Greenback to cough up some of its recent gains, as this would confirm that the Fed would be sitting on its hands possibly until the end of the year. Forex traders who are still counting on a September liftoff might ultimately be convinced to exit their long dollar positions. Either way, make sure you brace yourselves for a potentially volatile reaction or sudden reversals during the actual release.